The City's Capital Markets Section of the Corporate Finance Division manages the working capital and investments for all of the City's divisions as well as most of its agencies, boards and commissions. Exceptions are the Toronto Hydro Corporation, Toronto Community Housing Corporation and the Toronto Atmospheric Fund, which have different investment powers in their enabling legislation.
- Management must incorporate both the legislative constraints and the risk profile of each portfolio. Investment policies and procedures approved by Council annually provide guidelines for each portfolio.
- Although specific policy limits with respect to issuer names and credit quality limits vary among the portfolios, the primary objectives for all City investment activities, in order of priority, are:
- Ensure safety of principal
- Maintain adequate liquidity to fund the City's daily cash needs
- Maximize the rate of return while conforming to the first and second objectives
- In developing investment policies and goals for funds under management, primary consideration has been given to the objectives of each portfolio. Although the rate of return on assets is the principal measure of performance, the achievable rate of return is constrained by the parameters of the investment policy. This constraint has important implications for performance measurement and, in particular, the choice of a suitable benchmark with which to compare the rate of return.
- City of Toronto 2013 Investment Report
The average daily balance of the Investment Portfolio in 2013 was $4.4 billion. The portfolio balance peaked at approximately $5.7 billion in October 2013. A higher proportion of the portfolio was placed in the Money Market Fund to meet the anticipated short-term cash requirements for social services and other cost which have risen in 2013.
The purpose of a conservative asset mix allocation for sufficient liquidity is to avoid forced sale of invested assets, especially during a period when interest rates are anticipated to rise, which could result in capital losses.
The financial crisis that negatively affected financial markets in 2008 extended into 2013. Interest rates remained low, especially in the short end of the yield curve. The 5-year average of 10 year bonds during 2003-07 (pre-crisis period) yielded 4.388% while the average in 2013 yielded 2.26%, or a decline of 212.8 basis points (bps). The 5-year average of 1-year Government of Canada Treasury Bill during 2003-07 yielded 3.445%. The average in 2013 was 1.06%, a decline of 238.5 bps.
The overnight rate throughout 2013 remained at 1.00% and, for the year, the 30-day T-Bill return was 0.88%. This low interest rate environment has negatively impacted the interest income of that portion of the City's portfolios which are invested in fixed income securities.
The City's Fixed Income Investment Portfolios
The City manages several investment portfolios, each of which has specific objectives. Two individual portfolios that are managed interactively are the Bond and Money Market Portfolios. The Bond Fund is positioned towards funding the City's future reserve and reserve fund requirements and therefore takes a longer view of the market. The Money Market portfolio is primarily focused on ensuring that adequate liquidity is maintained to meet the immediate cash flow requirements of the City's daily operations.
When combined these portfolios provide the necessary diversification required in managing the City's total cash flow needs and the exposure to interest rate changes. Current revenues can be held in short-term investments until such time as the movement to longer-dated securities proves more suitable. Likewise, longer-dated securities can be sold to meet short-term expenditures if the opportunity to realize capital gains presents itself. Traditionally the Bond Fund provides an opportunity to obtain higher investment yields.
Capital Market Comments for 2013
Capital Market Conditions
One of the principal factors affecting the performance of the City's investment portfolios is the general level of interest rates that can be earned on fixed income investments.
These interest rates have remained unusually low for an extended period following the 2008 financial crisis. Although 10-year Government of Canadabonds generated an average yield of 4.388% during the pre-crisis period in 2003-2007, these 10-year bonds only generated an average yield of 2.261% in 2013. Similarly, 1-year treasury bills generated an average yield of 4.388% during the 2003-07 pre-crisis periods while the average yield in 2013 was only 1.059%. In 2013 the yield on 30-day treasury-bills reached a low of 0.880%.
Credit Risk Profile of Investment Portfolio
The final factor that impacts investor returns is the amount of risk that an investor is willing to bear. This is because borrowers will offer higher returns on instruments that carry a higher risk of default.
However, safety of principal is a primary City investment objective so overall risk exposure on the City's investment portfolios has been kept low. As shown below in Figures 1, 2, 3, the City does not hold any bonds with less than an “A” credit rating.
Figure 1 - Credit Ratings of the Money Market Fund Holdings
Figure 2 - Credit Ratings of Bond Fund Holdings
Figure 3 - Credit Ratings of total General Fund Holdings
Investment Portfolio Income for 2013 ($000s)
The investment return is based on earned revenues, which is comprised of earned interest income, realized capital gains/losses and amortized premiums/discounts. The 2013 distribution of investment earnings and their respective annual investment return is summarized in the following chart:
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